JCL Blog

It seems that just about every week I see something that reinforces how IBM is way out front in the customer centric-ness of big data. Here is a great video they posted on YouTube showing what they are talking about when they say Smarter Marketing:

Last year the Microsoft Office team produced a video showing their vision for the future. It is pretty cool.

Technology companies produce mountains of these aspirational works -- probably mostly to inspire their own people to get motivated and build the stuff. I still remember this video Apple showed in the 90s.

Dr. Francis Colins said:

The First Law of Technology says we invariably overestimate the short-term impact of a truly transformational discovery, while underestimating its longer-term effects.

At the time he was talking about he the human genome sequencing project, but it applies to all technological advances. We always want the future to get here sooner and we often are dejected, or at least frustrated, by the time it actually arrives. But arrive it finally does and we only have to look at the amazing things around us to confirm Dr. Collins' first law.

The buzz about the Internet of Things is roaring and we are not so much talking about how refrigerators are going to be on the internet, but an avalanche of billions and billions of sensors reporting everything from the proximity of cars to each other to advances in industrial automation.

China is doing its top down thing in an effort to lead in the industry. They just concluded their third Internet of Things Conference this last weekend. The EU has gotten underway with an initiative to establish standards and information sharing with their own IOT web site.

Here in the US it does not appear that there is a governmental initiative, but plenty of companies are working on building the tools we will need to make the most of the concept. IBM was probably first with its Smarter Planet initiative, now in its 4th year. Microsoft has StreamInsight, Oracle has its initiative, and there are many others.

It took the introduction of the iPhone in 2007 before people could visualize a world with billions of little computers in people's pockets. There had been smart phones before, there had been PDAs, but for some reason the iPhone showed us the way.

What is going to be the thing or event that breaks through and enables everyone to visualize the Internet of Things revolution?

Vertically integrated technology companies like Apple and Oracle have established themselves in the center of the the consumer and enterprise ecosystems by building proprietary systems with just about every feature contributing to customer lock in. The strategy has clearly worked for them, so far. Getting new customers is going to get more and more difficult for them as the world moves away from lock in and the competition does something other than push customers away by throwing up ill conceived and poorly executed competing products or services.

In this context a diverse and horizontally oriented technology firm will have a once in a decade opportunity to establish itself in the center of the new world -- not unlike the way IBM did in the ‘90s. In fact, we can learn a lot from Lou Gerstner's playbook from nearly 20 years ago. Here are the three partner relationship management things a company could do to establish itself at the center of the technology world of the next decade:

Embrace Open

The difference between open-ness and open source are more nuanced than can be described in this post. One similaritiy however serves our purposes. In an open system everyone is welcome. Everyone. Some companies can do this and others just cannot get their brains around it. Companies that are insecure about the value they deliver -- build walls and moats. Companies that are good at what they do are the ones that can let everyone in.

Love Engineering Great Products

A company with an engineering pedigree and that is full of talented people that love building great products has what it takes to be open. Such a product focus injects confidence into the decision making about being open.

Deliver Value Every Day

The irony of the lock-in strategy is that its is a cancer that eats the host from the inside out. IBM has shown us that the discipline of being open inspires everyone in the company to deliver value every day.

A company that works to immobilize its customers with contracts and proprietary and non transportable systems sends a message to customers -- but more damaging is the message it sends to the people inside the company. Soon the company is hiring more lawyers than engineers. And that cannot end well.

The papers love to report on the consumer end of the tech industry. All the while, a great deal of business is being done on the enterprise side. Admitedly, the consumer angle is tough to resist because if I had put Apple on this chart it would be up 373% in this same time period. So it is easy to see how journalists get drawn to Apple and the consumer business.

This chart shows how the big enterprise players have performed over the past 5 years:

(click on the chart to go to Google Finance for a larger view)

Microsoft and HP, the two companies that are drawn to the consumer flame but also have a majority of their business in enterprise computing, have not done as well as Oracle and IBM -- who are completely focussed on winning the enterprise marketplace. Microsoft just acquired Yammer - which shows a focus on business computing, but they also introduced the Surface, which is aimed back at the consumer.

Now would be a good time to show the focus that Oracle and IBM have shown.

Steve Jobs talked about the balance between product design and sales/marketing (as recounted in the Walter Isaacson biography) where he describes the arc of company evolution from great product creation to an over dependence on sales and marketing. The latter being the death of great technology companies like IBM and Xerox. Jeff Bezos is famous for saying that advertising is for companies that don't have good products. Of course neither sentiment is completely true. Great products still need sales and marketing and advertising is often a necessary tool employed to drive demand for a great product.

In my post Market Like an Engineer I proposed that people running marketing departments should encourage the virtues often found in an engineering culture in their marketing departments. The desire to create something truly new, the open sharing of knowledge, and the pursuit of critical customer feedback is often missing in the sales and marketing culture. These virtues suffer when the prevailing mindset is that salespeople are coin operated.

Over compensating on revenue drives out collaboration and the pursuit of the truth. Executives are forever tweaking compensation models to discourage these behaviors. Nevertheless, we regularly see glowing departmental revenue reports that merely chronicle a shift in revenue recognition from one department to another, or the quarterly selection of the "good" numbers cherry picked from pools of mediocre performance. It is just as common for the company to pay big bonuses the next quarter when this phantom revenue shows up in yet another department -- even though overall sales have not increased at all. It is no wonder leaders like Steve Jobs and Jeff Bezos want to spend as little as possible on sales and marketing. Those crazy incentives seem like they always produce unintended consequences, but at the same time seem essential for creating action.

There was a good article in the NY Times business section today about Google. Mostly about how Google is growing up. It reminded me of talk around Microsoft at the peak of its ride. At that time, the last thing Microsoft wanted to do was to become IBM. But they have. IBM has done an amazing job of reinventing itself as a consulting company, and Microsoft has taken over as the legacy systems company.

Google meanwhile, is under increasing pressure from governments about its monopoly power, and use of customer information. All of the sudden, Google is spending just as much time and energy dealing with the government as Microsoft did with the Justice Department in its day. Actually, IBM had that same problem too.

So the pattern is:

Old monopolist gets pounded by the government

New entrant uses the opening to build a new monopoly

New company is the darling of everyone (and stock goes to $600)

New company becomes old monopolist

Go to step 1

Also, today I started a new page where I am tracking the new tech bubble. Check it out here.

Erik Schmidt got some attention at the All Things Digital conference naming new horsemen in the tech industry. The old horsemen were commonly listed as Microsoft, Intel, Cisco, Dell. Schmidt rather self congratulatorily named Google, Amazon, Facebook and Apple as the new four. Sure things are changing, but a completely new field of horsemen, really?

What is it with the horsemen anyway? One must wonder how we got onto the horsemen thing in tech, it seems like we would want to stay as far away as possible from an allegory rooted in conquest, war, famine and death. If you have some time to kill, check out the Wikipedia entry for the Four Horsemen of the Apocalypse, for a not so brief introduction to the idea of horsemen.

Is there a new reality in tech and if so is this it?

With the possible exception of Dell, which specialized in advanced supply chain management, the old four developed technology and sold it to individuals and businesses and those customers employed the technology to achieve their ends. The old horsemen are in fact still in business, and will be for some time. IBM may not have liked being left off of the old list, but they have done pretty well for themselves in the last decade with their stock up 50% in the last decade compared to losses for the others.

With the possible exception of Apple, the new four don’t sell technology at all. I suspect they are often thought of as technology companies because of their use of the Internet in their business models. The wholesale switch is notable, and mostly for Microsoft. Indeed, Microsoft has not been performing well on the stock market over the last decade with a drop of over 50% while all of the others are up and Apple is up a whole bunch.

These new horsemen are going to drive the delivery of a new kind of computing services. Even if this shift only turns out to be half as big as Mr. Schmidt predicts, it is going to have a profound impact on how technology is sold. This is commonly referred to today as the migration to the cloud, and is so overhyped that often we forget to stop and think about what that actually means.

First a review, technology resellers used to make money marking up hardware and shrink wrapped software. Then they made money adding integration and support services to the sale of hardware and software, and next they will make money delivering innovation. Here are some examples of this phenomenon:

DropBox (www.dropbox.com) is a file system in the cloud. You can get to your files from any device. It is Amazon’s infrastructure on the back end, but no one has to know that.

WordPress or SquareSpace (www.wordpress.com; www.squarespace.com ) are content management systems in the cloud. Anyone can publish a website or blog on these sites and all of the hosing is handled. Although one step removed, these companies rely on Google for indexing and discovery. Google is also seeding the next wave of these companies with Picasa and Google voice. These may seem like birds of a different feather, but before you say so think about searching images or audio files. Google’s partners make money by helping their clients manage content and show up online in the right places.

Security is making sure content does not show up in the wrong places like when credit card information is stolen, or weapons system blueprints land in Peking. Facebook has designs on knowing who you are and where you are and (soon) what you buy and what you have access to. Making sure the keys to the kingdom, your keys that is, remain in your own control is important and will be big business. Emerging in this field are upstarts like Reputation.com and Klout.com, and established firms like Symantec.

Before you think that this blog post has gone off of the rails, let me state plainly that I am not proposing DropBox, WordPress, SquareSpace, Reputation.com, and Klout.com as services that partners can mark up and resell. I am proposing that these are the new channel partners and that they exist in a sympathetic ecosystem with the new horsemen.

These forward thinking channel partners do not think of themselves as channel partners. They think of themselves as the inventors of a new wave of services. Nevertheless, they are channel partners because they make money packaging new technology into services that add value to consumers and business.

Just about any 17 year old American male will tell you that finding a date to the prom is a difficult and humbling experience. Similarly, employers will tell you that finding a good employee is nearly impossible. Buyers of IT products and services will echo the sentiment: It is much harder than one would think to find and procure the technology a business needs to remain competitive. Ironically, if you talk to the other half of each of these matches you will find quite a different perspective. The Difference is enough to make you wonder if your grasp on reality is starting to slip away.

Girls start planning on being asked to the prom 6 months before it even enters the consciousness of boys. Even in this down economy, four million jobs change hand in the US – every month. And companies spend millions of dollars trying to find their next customer. For the past fifteen years the most successful companies on the web have aimed to do the matchmaking in these examples. Online dating sites like match.com, eharmony.com, and some would say the entire porn industry have set out to capitalize on the first matching challenge. Monster.com was one of the first Internet companies to buy a Superbowl ad, and Google, Bing, eBay, Amazon.com and now Groupon get paid quite well to connect would be buyers with would be sellers right at the very time the buyer wants to buy.

So successful internet business equals: find an area where matchmaking needs to be done and have at it. If you think you are late to the game, think again. This internet thing is just getting started and there are many more untapped opportunities than tapped ones. Yes indeed, Classmates.com, Facebook, and Yelp have all been invented already. However, no one has even started to work to match enterprise technology buyers to enterprise technology sellers. We all have lists of markets we would like to see better matchmaking tools on the internet. Doctors to patients, kids to educational tools, scientists to research subjects, and even people to movies as the million dollar Netflix challenge demonstrated are all up for grabs. For now, let’s focus on enterprise IT match making.

There are many things that stand in the way of solving this problem, but none as big as the lack of trust. Trust has been eroded between the buyers and sellers of enterprise technology through repeated over promising and under delivering of products and services to the point that even the historically accepted measure of ten times better is no longer sufficient to get a business buyer to make a change and buy something new. In the technology industry this phenomenon is sometimes labeled vaporware – software that has been promised to customers that does not even exist. The risks for the buyer are quite large and even larger without vendor trust – and this slows down the adoption of new technology significantly.

Adoption of new technology is the key to increases in productivity and increases in productivity drive our economy and increase our standard of living. Therefore one of the things standing in the way of our economic recovery is trust.

Successful matchmakers employ three simple tactics to get right at the trust issue:

Make money on the success of the match: A business model built on making the match between technology vendor and technology user, instead of making the sale of technology, aligns the interests of the parties and turns the matchmaker into a trusted advisor.

Be transparent about how money is made: A matchmaker advocating for a particular solution will always be suspected of doing so selfishly. Full disclosure of how the matchmaker gets paid will drain away this suspicion.

Demonstrate deep and wide knowledge: It is natural to sell what you know and stay away from what you do not know. Demonstrating a detailed understanding of all of the products in the category will validate the trusted advisor status.

The two most trusted matchmakers in business IT are Accenture and Deloitte. IBM is a giant in the IT matchmaking business, but is also pushing its own technology. At one time EDS, Perot Systems, and ACS were on this list -- until they were acquired by HP, Dell, and Xerox -- which changed their motivation from matchmaking to selling their own technology solutions.

This will be a very interesting area to watch in the years ahead as new companies flood in to fill the trusted matchmaker void created by this consolidation.

Even though a significant majority of technology purchases are made by businesses, the consumer is rapidly gaining a meaningful position in the market. According to Gartner, in 2010 businesses will drive 72% of technology purchases. The iPhone/iPad revolution is largely driven by consumer purchases. As these devices are introduced into the enterprise computing environment, IT professionals are developing strategies for managing them. Forward thinking technology marketing people are presently working to understand how these changes will impact IT purchasing decisions in the enterprise.

Here we examine the arc of this revolution and make an attempt to help marketers position themselves for the evolved technology marketplace.

The Cost of Selling is High for the Enterprise and Low for the Consumer

Maybe it is cheap to sell to the consumer because consumer products are cheap, or maybe consumer products can be offered cheaply because it is cheap to sell them. Either way, it costs much less to sell to the consumer than the enterprise, and in some cases the cost of customer acquisition is approaching zero. Alternatively, over on the enterprise end of the spectrum, we find companies like Salesforce.com – whose largest expense is for customer acquisition. For 10 years SFDC has spent over 50% of their gross margin on sales and marketing – and this year they will spend over $700 million. Ten times as much as it will cost them to deliver their services. Right behind Salesforce.com are Oracle, IBM, HP and Microsoft each spending over 20% of their gross margin on Sales and Marketing.

When it comes to selling the approaches cannot be more different, consumer companies like Google sell by getting their customers to act as their own salespeople (filling out a form on the web), quite a contrast to Salesforce.com and the others who are seeking business customers by blanketing the earth with salespeople and partners.

Getting to Market: To Advertise or Not To Advertise

Even companies with buckets of money must select a go to market strategy and concentrate their resources in what they believe are high value activities. There are as many opinions about which strategy works best as there are CMOs – but just about all CMOS will agree that resources must be concentrated in high value activities consistent with their strategy. Anyone spreading their resources thinly over too many activities is doomed. The decision tree starts with advertising. There are companies like Apple and Dell that go big on advertising and PR and companies like Microsoft and HP that invest their resources in building partner ecosystems. A completely different third approach is lowering prices so far that solutions sell themselves. Google and Craigslist price their services at 1/10th of their offline competitors. Prices this low promote themselves – a $3,000 car or a $1 movie ticket would not require advertising or salespeople – the newspapers would write about it and the message would spread virally.

Let Someone Else to Pay

There is no charge for using a search engine or web service like Twitter or Facebook. Using a free product does not make you a customer however. The customers of these companies are the advertisers, and their payments for advertisements make it possible for companies like Google, Twitter and Facebook to offer valuable services for no charge to those benefiting from them. No monetary charge would be a little more accurate. The truth is: those not paying for a service are not the customer, they (or their data) are the product being sold to someone else. This is where the gulf between consumer and enterprise gets interesting. Individuals are much more willing to give up their data in exchange for a free service. Enterprise data is almost always a strategic asset and therefore most businesses are reluctant to trade their data for services. Salesforce.com’s clients are businesses and they pay for the service because giving up their data to be sold to a third party would undermine their viability. Google gets right up to the line on this one because they are selling the data they have about their customers to third parties – and many of their customers are businesses. Admittedly Google is not going to one client and saying they will sell the content of another client’s searches or emails. They will however allow one client to present advertisements to a targeted audience that is likely to include its competitor’s customers or employees. This is evidence that the gap between consumer and enterprise buying habits is closing.

Mixing it up: Put the Blender on Whip

Twenty years ago, with the exception of a few intrepid door to door salespeople, the consumer went to the store and salespeople called on businesses. Then Amazon.com brought the store to the consumer’s home, and Dell cut out the salesperson by giving businesses the ability to serve as their own salespeople over the phone and web. The consumer and business buyers including those in the technology market had been oil and water, and they were about to get poured into the blender. When the first killer app for the consumer oriented Mac turned out to be the business oriented use case of desktop publishing – it was like hitting the chop button on the blender. Employees connecting their home computers to corporate networks, enabled largely by broadband deployment, was the equivalent of the stir button. Social media tools like MySpace, Friendster, LinkedIn, Facebook, and Twitter turned the blender up to puree. And as we are learning in our one question survey this month, the iPhone and iPad have cranked the margarita making machine up to whip and the water and oil have emerged as thick as chocolate mousse. With consumer tech and enterprise tech all whipped up together, selling technology now takes on a combination of enterprise selling and consumer selling tactics.

Enterprise Marketing Must Change

Right now there is a great deal of energy being invested by enterprise marketing people in social media. This is important, but not the only area where the enterprise / consumer collision is impacting the market. We will never know if the big brains at Apple developed their iPhone/iPad strategy with an eye on the enterprise market. Intentional or not, their shiny new devices are changing the marketplace and buying patterns significantly. Starbucks is moving to HTML 5 and away from dot net as a result. Flash is being marginalized. And products like those from Parallels that tie the new environment together, are ramping fast. Enterprise marketers need to free their minds from a focus on making the things they have always done more efficient and start experimenting to develop new strategies that are effective in this new marketplace.

On the Horizon

As participants in technology marketing for the enterprise, these are the trends we expect to see accelerate as a result of the blending of the consumer and enterprise markets:

Social Media: Clearly social media will be central to these changes, both driving and being driven by the marketplace evolution. The key to social media is authenticity. They key to authenticity is flexibility and IQ. Companies with intelligent and autonomous actors on social media platforms will win. It does not hurt that the highest value customers are the early adopters of social media. 100 years ago, when telephones had been deployed in 10% of the households, companies realized that the early adopters of the telephone were on the high end of the socio-economic ladder and should be treated as such. Once telephones achieved 98% penetration, and the overwhelming majority of phone calls came from average customers, companies shifted their approach from high investment in high value customers to cost containment. This is why a Comcast customer can get a high quality response from @comcastcares, and not from the Comcast call center. Comcast knows the demographics of their social media savvy customers. It will be some time before social media is democratized. To Do: Get smart people into the social media game.

Computer Operators: Before the computerization of the telco central office, switching was done by telephone operators. An operator could manage approximately 200 telephone lines. We now have 180 million land lines and over 200 million mobile lines in the US. If we had to rely on manual switching – we would now require 1.9 million telephone operators. Thanks to automation we only have 22,000 telephone operators now and none of them are switching calls. In the early days of the computer an operator with significant training was required to run the device. This continued during the early days of the PC. The devices were complicated enough that every user was essentially a trained computer operator. It has only been in the last 10 years that computers could be operated without the barrier of significant training. The iPhone and the iPad are revolutionary in that they require no specific training at all. A child can pick one up and figure out how to use it. Many businesses now operate without a single IT resource on staff. Computer operators are not dead however, they have shifted to managed IT service providers, web service operators, and application developers. This trend will continue to accelerate. Business will be less technically aware and will purchase services from specialized service providers. The service providers will have all of the computer operators and accordingly will increase in sophistication and technical capabilities. This will split the marketplace into the sellers of the services and the sellers of the underlying technology. The services will be purchased by people with business needs and a low level of technical sophistication. The underlying technology will be purchased by people with an extremely high level of technical sophistication. To Do: Market services by business use case and technology by engineering merit.

Partners Migrate to Service Sales: The bifurcation of technology into unsophisticated (technically that is) buyers of services and very sophisticated buyers of the underlying technology will force a split in sales and marketing strategy. The big technical deals will get bigger and will be increasingly sold using internal salespeople. This will shrink the high end of enterprise technology sales and marketing done through partnerships. Who is going to sell servers to Amazon.com? IBM, Dell, HP, and others will be competing for that deal directly. Who is going to sell desktops to the law firm? Channel partners. Historically those partners have been companies. Of course because partnerships are relationships, and relationships are between actual people, the reality has always been that the success of these partnerships depend heavily on the relationships between the people inside the companies. For fifty years, people have been getting more and more mobile, a trend that has been accelerated by the latest economic challenges, and facilitated by social media tools. Technology companies that are able to shift their thinking from partnering with companies to partnering with people will jump well ahead during this transition. To Do: Orient partner programs to individual people that sell services.

In the years ahead businesses will remain the most significant source of revenue in the technology industry. Businesses will however increasingly behave like consumers when purchasing service offerings. They will be looking for cost effective solutions to their most pressing needs, and they will be buying those solutions on short lead times and with relatively low technical sophistication. Vendors and solution providers that position themselves for this change will win in the transition.

Smart phones, tablets, TVs, app stores, Twitter, and Facebook (and the movie) sure seem to get the bulk of media attention. HP now has over $114 billion in revenues, the largest part generated selling to the enterprise, but their consumer products get all of the coverage. IBM has 400,000 employees and also generates nearly $100 billion in revenues – rarely ever mentioned – because it is focused on the enterprise. Microsoft, well Microsoft just never gets mentioned. See my post the other day on the Pew Study. If Larry Ellison wasn’t pulling stunts with the Americas Cup or Mark Hurd, no one would ever cover Oracle in the media.

Real work is being done hardening networks against cyber terrorism, lowering total cost of computing, developing and enforcing enterprise standards, safeguarding large amounts of sensitive data, and developing industry specific solutions. This work is done with rarely a mention in the press. My explanation: enterprise computing is complicated, hard to understand or explain, and most of all it is boring. To Journalists, Facebook is Paris Hilton. Write about either of them and your web site gets hits. Write about lowering energy consumption in data centers and you might as well be covering anything having to do with sub Saharan Africa’s problems.

We really have not had big coverage of business tech issues since Y2K – over a decade ago. Could it be that we are due for a surge in enterprise coverage? It may make sense to think for a minute about events that could cause this to happen and how it might impact the technology industry.

Here are three things that could bring enterprise computing closer to the center of technology media coverage:

A Big Security Event: Let’s hope it never happens, but if a big section of the power grid goes down, or all of the credit cards become inoperable, or a cyber attack crashes the stock market, the media will start to pay attention.

Follow the Jobs: If big tech starts hiring again and makes a dent in the unemployment rate it will be a big story. Unfortunately, this probably is a result of the changes we would like to see instead of the cause.

Someone Connects the Dots: Google and Facebook are largely considered consumer businesses. They are however, big enterprise operations in their own right however. The media could latch onto the fact that Google’s network of data centers, gigantic databases, and all of the infrastructure required to run its business is cool and worth paying attention to.

What would change and why should we care?

The Money Follows the Media: A lot has been written lately about how the VC business is changing. The story is that the investment exits are not there and new tech start ups don’t need as much money to start. It is true that someone building for the Apple App store does not need to raise much if any venture capital, and may never go public. Venture capital is needed just as much now as ever before. The VCs do seem to follow the media, so if the media goes enterprise, maybe the VCs will too. Thomas Friedman would sure be happy if we started funding green tech instead of another Twitter clone.

Exports Up: Technology innovation is something we can do well and we can export. Enterprise computing is harder to knock off than a movie or an iPhone. If we build more capacity in our big business computing services – we could export it. Companies like IBM, HP, Microsoft, Oracle, and others are already doing this in a big way – so we know how to do it. And the balance of trade needs attention.

Do Our Part: If this were to happen, all of us could be proud of our contribution to the worldwide economic recovery. Instead of presenting a military face to the world, or fancy financial engineering – which deploys just as much of a scorched earth approach as the military, we could be helping companies and governments around the world increase their productivity. And they would pay us for it! Good for us and for them.

I hope someone figures out how to make enterprise computing interesting enough to get some media attention. Could do us all some good.

While reading the article, some roads converged in my technology imagination, mostly in the areas of labor arbitrage, automation, and customer service. The effects of these changes are going to be felt slowly over some time -- but they will be significant.

Labor Arbitrage

We are a decade into the Internet enabled off-shoring movement fueled mostly by low cost labor. Technology innovations only happen when the innovation is ten times better. Offshore labor does not have to be 1/10th the onshore cost, but it needs to be at about a third in order to work. If we are paying $9 per hour onshore for something that can be done for $3 per hour offshore -- the inefficiency of distance and the added cost of travel and/or transport can be overcome. If onshore and offshore labor rates converge, off-shoring will become less compelling. This convergence can happen by offshore labor rates rising as competition for workers and living standards are raised in offshore markets, or as onshore labor rates fall. Wait, how can onshore labor rates fall? Through automation.

Automation

Everywhere we look we see automation. Cars are still being built in this country because robots do most of the work. We see the combination of automation and self service every time we go to the bank machine or the grocery store. Google signs up customers without any salespeople -- which is automation displacing labor in yet another way. The IBM Watson project may seem too theoretical to start displacing humans, but as the NY Times piece points out, the first application may be in the call center. Giving the computer the job of answering customers complex questions. Just like on the manufacturing line, the bank machine, or the grocery store, the computer does not have to answer all of the questions, just a good percentage. When the human's job becomes handling the extreme exception and managing the machine -- the skills required and the associated pay are each increased significantly. At the end of this road lies a customer service capability for companies who have never operated in that mode.

Customer Service

Search for "Google Lack Customer Service" and you can read for days about how Google just does not do it. This is a cause for relief by some of Google's more customer centric competitors. When IBM delivers to Google an engineering driven answer to this deficiency it will be as big as any significant change in an ecosystem. Kill all of the wolves and the elk population goes through the roof. Google is not the only engineering driven company that will benefit. HTC and many of the other sophisticated OEMs, will be able to accelerate their evolution from manufacturer for others to full competitor. The ecosystem will never be the same.

Earlier this year I heard a presentation by Jaron Lanier where he gave the low cost labor countries like India, China, and the Philippines 20 years to get up the education ladder far enough to be safe from the flood caused by automation. Could be 20, I would guess 10.

Building Analytics Capability: “… the knowledge of the world, the flow of markets, the pulse of societies — can now be turned into insight through sophisticated mathematical models, also known as analytics. Where once we inferred, now we know. Where once we interpolated and extrapolated, now we can determine. The historical is giving way to the real-time, and even the predictive. IBM is moving quickly to capitalize on this promise. We have built the industry’s premier analytics practice, with 4,000 consultants, mathematicians and researchers, as well as leading-edge software capabilities — bolstered by key acquisitions such as Cognos and SPSS. Our new Business Analytics and Optimization service line targets the highest-growth opportunities by delivering integrated analytics solutions based on the needs of specific industries.”

Changes in the Cloud: “Thus, the data center is shifting from being a single physical place to something more like the Internet, a diverse set of services fueled by IT.”

Customers Want: “So the questions we are hearing are no longer about whether a smarter planet is a real possibility. Now, there is an enormous hunger to learn how. CEOs, CIOs, governors and mayors are asking questions like: How do I infuse intelligence into a system for which no one enterprise or agency is responsible?”

From the Financials: 2009 total revenue:

$95 Billion Global Technology Services Group: $37 Billion

Strategic Outsourcing Services

Business Transformation Outsourcing

Integrated Technology Services

Maintenance

Integrated Technology Delivery

Business Process Delivery

Global Business Services Group: $17 Billion

Consulting and Systems Integration

Application Management Services

As I read through the report some recurring themes indicated what IBM thinks will be big in the future:

Cross Platform: No one vendor can solve all problems so there is significant value in being able to work across platoforms

New Ideas: Clients will pay for ideas they cannot think of themselves (new processes, new technologies, ideas that span systems or departments)

Outside the Company: Security, compliance, and standards are among the functions that can be done better by outsiders

So if you want to pick the winners of the future, pick companies that deliver technology related services that tie together different technology manufacturers and add some intelligence along the way.

I am not smart enough to pick the big winners in advance. So I don't play the stock market, and at CSG we sell shovels to the gold miners instead of prospecting for gold ourselves. Sure striking it rich would be a thrill, but the world is littered with hundreds or even thousands of would be Googles. I was going to say would be Twitters, but they have not made any money yet!

This strategy has provided us with a very interesting vantage point from which to watch the show. And it is quite a show these days. I sure am glad I am not a telecom equipment vendor or a distributor -- it is easy to see what is going to happen to them. It is much easier to pick the descending parts of our industry than the ascending. Who in tech is going to do well?

There has been so much talk about services over the past ten years that we have both lost interest, and lost track of the definition of services. There are hosting services, IT services, software as a services, software + services -- and each time the word services means a different thing. IBM, Dell, HP, Microsoft, and Oracle all have significant services organizations. IBM generates more revenues from services than all of Microsoft's revenue. What is IBM doing when they deliver services to their clients?

Business pay IBM 50 billion dollars a year for services. And everyone in tech wants to get into services. I propose that we could learn a bunch about the future winners by digging into the question -- what are people paying IBM 50 billion dollars a year for?

Stay tuned, in tomorrow's post I will dig through IBM's annual reports.

I pointed out the other day that IBM's stock outperformed Google's over the past 4 year period. There are many things we can learn from the granddaddy of all technology companies. In its 130 year history, IBM has had more "eras" than most tech companies have had years. In fact, IBM tangled with the Justice Department before Bill Gates was even born.

The one thing that has always impressed me about IBM is how they seem to be playing on an entirely different level than anyone else. Real companies count on IBM to give them real solutions to real business problems. Every time I find myself in a conversation with a senior exec at IBM I am reminded that they have managed to continue to operate at this level regardless of the headlines of the day.

Somehow I just don't see IBM burning R and D budget on a Twitter clone.

Curiously, IBM also does a great job with its ads. They come up with fun and memorable ways to make the point that they are serious about business. Here is my favorite one: which is probably 10 years old now but it still resonates.

Take a look at this chart showing percentage increase in stock price over the last four years for Microsoft, Apple, Google, and IBM. These are the top four companies in terms of market cap in the technology sector. Apple is blowing it out -- which is no surprise -- at 275% over four years. Microsoft is in the back of the bus -- also no surprise. Google and IBM are in the middle and IBM has performed better that Google over the past 4 years -- that was a surprise to me.

How many salespeople does a country need in order to achieve its GDP growth? Can salespeople increase GPD (pull us out of a recession)? If we only had enough salespeople, we could put the whole country back to work. Clearly the world is not this simple, but hidden in a ridiculous argument like this may be a few interesting things to think about.

Every industry has its key metrics and just about every industry has salespeople. From what I can tell the mid point in salesperson production is about $1 Million in revenue and $100,000 in compensation. A Starbucks Barista would generate much less and get paid much less, and a bond salesperson on Wall Street -- well much more on the pay part anyway!

So I know this number is weak, but let's just go with it for this discussion. One salesperson = $1M in Revenue.

The other day I analyzed 8 tech companies including Apple, Google, Microsoft, IBM.... Together those companies generate $400 Billion in revenues. Using our little formula above, they collectively would need to have 400,000 salespeople to generate this amount of business. Even though they collectively employ 900,000 people, clearly half of their employees are not in sales.

So where do all of those other sales come from? Some from automation (Google's service apparently sells itself), but most comes from channel partners. Partners ranging from the distributors, to the retailers, to the four person computer consulting company in Everytown, USA.

Despite what has been happening on the NYSE the last few days, the economy is showing signs of life. Our President is looking for ways to get more jobs into the recovery. Many economists are pointing towards small business as the place where the hiring is going to happen. Well the President should be proud because this is exactly what we are seeing happen right now.

The large technology companies are ramping their channel partner programs up in a big way. This is presenting many opportunities for growth in their channel partners, and those channel partners are hiring. And for every 100,000 new salespeople we will grow a whole IBM ($100B) worth of new GDP.

My first job out of college was as a Computer System Analysis for Boeing Aerospace in 1987. Our group of about 16 people had two responsibilities: get office users in the company to start using all of the computers the company had bought, and establish standards for desktop computing. For those of you who are interested, back then we did email on the HP 3000, used Netware for PC networking, did word processing with Word Star, databases on Rbase, and Lotus123 for spreadsheets. And all of the PCs ran on MS Dos.

I remember getting a call one day from a friend at Microsoft who was working on the MS Word team (Dos only back then) asking about how we made decisions and the dynamics of the relationships inside the company and how influence impacted purchasing decisions.

Microsoft already knew that its success depended on its partners (Novell, WordStar, Rbase, Lotus...) who made apps that ran on their MS DOS platform. Microsoft was just starting to think about another layer to their partner program; internal or external consultants that had an influence on setting standards and purchasing decisions. Back then everyone bought software from Egghead Software -- in today's lexicon, Egghead Software was the Microsoft App Store. It sold all of the applications available to run on the Microsoft Platform. Microsoft has evolved considerably since the late 80s and now has as many partners in the consulting side as it has in the application development side.

Steve Jobs made a big deal last week about the iPhone/iTouch/iPad Platform, the 140,000 applications, and the 3 billion downloads. In technology we love new things and really don't like old things much. So the whole platform idea has been recast as new by Apple. Microsoft has so many applications built on its many platforms that no one can even count them all.

Apple may have a large and growing number of people writing applications for its platform, but in an effort to completely control its environment has actively discouraged hardware partners - even bringing out its own chip this time - and has no interest in building a consulting partner base.

All of this reminds me a little of a company everyone thought was on the way out 20 years ago -- but now generates $100B in revenue with 400,000 employees (IBM).

We are coming into earnings season and accordingly we have the chance to look at the financial reporting of companies in our industry. IBM and Google both posted their numbers last week and that got me to thinking about one of my favorite subjects -- how companies choose to spend their money. Specifically I am interested in how much a company spends on sales and marketing, how that compares to engineering (R&D), and how they each compare to the amount of money a company has available.

We know that gross profit as the amount a company has available to spend on all things not associated with delivering their products or services to customers. There are essentially four places this money goes. General and Administrative, Sales and Marketing, Research and Development, and Profit. A company cannot survive without just the right balance of each of these four things. So I thought it would be interesting to take a look at how eight well known companies in the technology industry choose to spend their money.

Here is a graph comparing the companies on sales cost as a percentage of gross profit. Google has made a big point that their products are so good they sell themselves. They clearly are backing that up with good performance. They are only spending 13% of their gross profit on sales and marketing. The only company spending less is Amazon at 11%. One could argue that insufficient investment is sales will show up in slower growth rates -- but both Google and Amazon are defying that with 8% and 20% growth rates respectively. Salesforce.com is also growing at 20%, but is spending 57% of its gross profit on sales and marketing. So I think you want to be on the left end of this chart -- spending enough to grow the company but not too much.

Anyone wishing to have products that are so good they can sell themselves should be investing in R and D. One of the highest impact decisions a CEO can make is allocating resources between sales and engineering. The temptation is to invest more in sales because the results will show up faster there. But a company that starves its engineering effort in order to invest in short term sales results will pay the piper later. Here is a graph showing R&D spending as a percentage of gross profit. I think the left side of the chart is where you want to be for long term health in the company.

Once we add the two together, it is interesting to see that Apple, Google, and Amazon end up on the good (left) end of the chart. And all three of them are also turning in impressive growth numbers. The stock market agrees with this analysis because these three companies are on the high end of P/E ratios as well. Strangely, the highest P/E ratio of all is for Salesforce.com -- a staggering 110. I don't get this. To me it seems like Salesforce.com is having to try very hard to generate revenues by spending 57% of its gross profit on sales and is investing less than anyone in R&D. Could be a correction in the works there.

Finally, I think sales spending and engineering spending diverge in one significant area. Sales should always be compared to near term revenue, but investments in engineering can in some cases be disassociated with current revenues. In other words, size does matter here and this is where we see Microsoft flex its muscles. Microsoft is not spending the highest percentage of gross profit on R&D, but it is way ahead of the pack on total dollars committed -- over $9 Billion! This is a full 50% more than the next biggest number which is IBM -- who has 4 times the employees and two times the revenues.

Microsoft is spending six times as much as Apple. So far Apple has been the premier innovator -- something that will be hard to forget this coming week. But don't count Microsoft out yet.